“One reason we see pay-for-performance models favored is they are generally viewed more favorably by the shareholders, to the extent that the achievement of financial performance is linked to value creation for the shareholders,” says Noah Kaplan, a managing director at corporate strategy advisors FW Cook.

According to FW Cook, 88% of the 250 largest S&P 500 firms utilize performance-based compensation for some portion of executive pay, where total compensation is most often tied to revenue or profit goals and paid out in equity. However, executive compensation is not always linked so directly to shareholder returns, which tend to materialize over long-term time horizons.

If a company is pursuing short-term goals, such as a dramatic business transformation, then performance-based compensation models tend to pay out in cash, rather than equity, to reward short-term accomplishments.

But, despite the ubiquity of pay-for-performance structures in U.S. corporations, it’s unclear whether the conditional compensation model is actually effective at driving performance. Kaplan notes that because so many companies deploy pay-for-performance systems, and do so consistently, there are almost no control cases to measure their success against.

Performance-based compensation can even be a little unfair to executives—for example, when black swan events, like the COVID-19 pandemic, disrupt business operations beyond the CEO’s control. Yet according to FW Cook’s research, the number of top S&P 500 companies implementing pay-for-performance models has actually risen since before the pandemic.

Just last month Dominion Energy, the Virginia-based power company, announced it was making the non-salary part of its CEO’s compensation 100% performance-based, to “align CEO compensation with long-term share price performance, consistent with the objectives of the current strategic business review.”

Dominion Energy’s share price is down roughly 25% from a year ago and has fallen faster than the average for the S&P 500 this year. Now that Dominion Energy has aligned its CEO’s pay with shareholder returns, without changing CEOs, the company might serve as a fair test for whether these compensation models work. 

But Jon Burg, managing partner at corporate advisor Infinite Equity, is skeptical that pay-for-performance models actually do much to drive performance. He says they’re more useful as a tool for setting goals.

“Agreeing on a performance-based compensation model helps establish what the board expects of the CEO,” Burg says. “But once it’s agreed upon, I don’t know that someone’s actual performance [changes]. It probably comes down more to their own capabilities.”

Since CEOs will typically have a salary that isn’t conditioned on performance, Burg says, executives are more likely to view the conditional part of their compensation as a bonus rather than a necessity.

So do pay-for-performance models actually work to ensure CEOs deliver on targets? Perhaps not as much as simply hiring a manager you can trust.

Eamon Barrett
eamon.barrett@fortune.com

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You still can’t trust ChatGPT
OpenAI released an updated version of its sensational chatbot, which the group has called GPT-4, but warned people to take “great care” when using it. OpenAI CEO Sam Altman tweeted, “[GPT-4] is still flawed, still limited, and it still seems more impressive on first use than it does after you spend more time with it.”

Is time running out for TikTok?
Bloomberg reports that the U.S. Treasury Department has told TikTok’s Chinese parent company, ByteDance, that it must spin off the company entirely or face a ban in the U.S. Washington has been scrutinizing TikTok on national security grounds since 2020, alleging that the Chinese-owned app could be providing sensitive data to overseers in Beijing. TikTok CEO Shou Zi Chew is due to testify before a House committee on the app’s data practices next week.

Credit Suisse
Trust can be a fickle thing. On Wednesday, investors in Credit Suisse panicked and dumped shares, ripping 30% off the bank's market cap, after the chairman of Saudi National Bank, Credit Suisse’s largest shareholder, told a reporter he would “absolutely not” be investing more money in the troubled Swiss bank. But a day later, after Credit Suisse said it would take a $54 billion loan from Switzerland's central bank to buoy its plagued operations, investors pumped Credit Suisse’s share price back up 40%.

TRUST EXERCISE

In the latest episode of Fortune’s Leadership Next podcast, Prudential Financial CEO Charles Lowrey muses on trust, ESG investing, and long-term sustainability:

“If we take a step back and ask ourselves, 'What do we really do?' We create long-term promises. Those long-term promises are measured in decades—50, 60, 70 years. We sell you an insurance policy. You need to have the trust in us that we’re going to be here in 70 years to fulfill that policy. So we think in decades. How do we do that? Because we have to create a sustainable company that is sustainable through the cycles.”